Audit Report

Audit Report

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Washington State Auditor’s Office Special Investigation Report Seattle School District No. 1 (Seattle Public Schools) King County Report Date February 23, 2011 Report No. 1005180 Issue Date February 23, 2011 Washington State Auditor Brian Sonntag February 23, 2011 Board of Directors Seattle Public Schools Seattle, Washington Report on Governmental Special Investigation Attached is the official report on our special investigation at Seattle Public Schools. The State Auditor’s Office received a report of a suspected loss at the District. The notice of suspected loss was submitted to us under the provisions of RCW 43.09.185 of the Revised Code of Washington. We investigated the suspected loss independently and objectively through interviews and by reviewing relevant documents. This report contains the results of our investigation. Questions about this report should be directed to Audit Manager Carol Ehlinger at (206) 615-0555 or the State Auditor’s Office Fraud Manager Sarah Walker at (509) 454-3621. BRIAN SONNTAG, CGFM STATE AUDITOR cc: John Cerqui, Seattle Public Schools District Attorney Insurance Building, P.O. Box 40021  Olympia, Washington 98504-0021  (360) 902-0370  TDD Relay (800) 833-6388 FAX (360) 753-0646  http://www.sao.wa.gov Investigation Summary Seattle Public Schools King County 2005 through 2010 ...

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Washington State Auditor’s Office

Special Investigation Report






Seattle School District No. 1
(Seattle Public Schools)
King County



Report Date
February 23, 2011


Report No. 1005180





















Issue Date
February 23, 2011




Washington State Auditor
Brian Sonntag



February 23, 2011


Board of Directors
Seattle Public Schools
Seattle, Washington

Report on Governmental Special Investigation

Attached is the official report on our special investigation at Seattle Public Schools.

The State Auditor’s Office received a report of a suspected loss at the District. The notice of
suspected loss was submitted to us under the provisions of RCW 43.09.185 of the Revised
Code of Washington. We investigated the suspected loss independently and objectively
through interviews and by reviewing relevant documents. This report contains the results of our
investigation.

Questions about this report should be directed to Audit Manager Carol Ehlinger at
(206) 615-0555 or the State Auditor’s Office Fraud Manager Sarah Walker at (509) 454-3621.


BRIAN SONNTAG, CGFM
STATE AUDITOR

cc: John Cerqui, Seattle Public Schools District Attorney

Insurance Building, P.O. Box 40021  Olympia, Washington 98504-0021  (360) 902-0370  TDD Relay (800) 833-6388
FAX (360) 753-0646  http://www.sao.wa.gov
Investigation Summary

Seattle Public Schools
King County
2005 through 2010


EXECUTIVE SUMMARY

On June 28, 2010, Seattle Public Schools reported a suspected loss to the State
Auditor’s Office related to its small business development program. At the District’s
request, we investigated the suspected loss independently and objectively through
interviews and by reviewing relevant documents. We commend the District for notifying
us in a timely manner and for its outstanding cooperation during the investigation.

Results In Brief

The District paid $1,519,965.34 for services with a questionable public purpose.
The District paid $280,005.25 for services it did not receive and for services that
benefitted a private company.

Background

The District created the Historically Underutilized Business Technical Assistance
Program (HUB/TAP) in 2006 to provide training for small businesses. In 2007 the
District converted HUB/TAP to the Regional Small Business Development Program
(RSBDP) due to a change in state law. The purpose of the RSBDP was to help small
businesses in the Puget Sound region overcome barriers to bidding on government
contracts. The District operated the RSBDP between September 2007 and September
2010.

Small business owners with gross revenues under $1 million qualified for the District's
RSBDP, which provided training and technical assistance to participants at no cost. The
program was not intended to guarantee contracts or to target preferred contractors for
one-on-one assistance.

Between 2006 and 2010, the manager of these programs awarded contracts to vendors
for services such as outreach, instruction, consulting services, marketing and lobbying.
During our investigation, we reviewed payment vouchers and other documentation and
determined the District paid for services that were never provided. We also found in
some cases that documentation was insufficient to support the charges or show their
District-related purpose.

For the 2009-2010 school year, the District decreased funding for the program. Without
the District’s knowledge, the program manager formed a private company on
February 22, 2010, that he named the Regional Small Business Development Program.
Although they share a name, the District program and the private company are not
associated with one another.
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Between October 2009 and June 2010, the District’s program manager was transitioning
the District program to the private company. The Executive Director of Facilities was
aware of this transition. During this time, the program manager hired consultants to
provide services benefitting the private company and directed them to bill the District.
The program manager approved these invoices and submitted them for payment. Due
to inadequate oversight of the program manager, the District paid these invoices.

Also, in March 2010, the program manager contracted with the city of Bellevue to
provide RSBDP classes. In a separate agreement, he leased office space from the city
for the private company. The program manager misrepresented these contracts as
between the city and the District. The contracts were for the benefit of the private
company.

The program manager resigned on June 7, 2010. The District retained him on June 8,
2010, as a consultant to the program. The contract was terminated June 23, 2010. The
program manager’s direct supervisor, the Executive Director of Facilities, left District
employment in July 2010. The District decided to end the program in September 2010.

Our investigation determined:

The District incurred losses totaling $280,005.25 by paying for services it did not
receive and for services that benefitted the private company.
The District paid $1,519,965.34 for services with a questionable public purpose.
We define questionable as a payment by the District for which documentation
lacked sufficient detail to allow us to determine the validity of the charges or for
services that did not directly benefit the District or for services that could have
been performed by District personnel.
The city of Bellevue incurred losses totaling $39,873.40 by paying for services it
did not receive and for a real estate broker commission on a lease agreement
broken by the District’s program manager.

How This Happened

Lack of Oversight

The program manager reported directly to the Executive Director of Facilities. The
Executive Director did not adequately supervise the program manager. During our
interview with the Executive Director, he stated “the program manager . . . should have
been providing the oversight” of the program. He also stated he “managed the program
manager just like everybody else” who reported to him.

On April 19, 2009, the Executive Director reprimanded the program manager, in writing,
after an external consultant performed an unfavorable review of a process used to select
contractors for the District’s small works roster. The Director removed the program
manager’s authority to award small works construction contracts for the District, but did
not remove the authority to award consultant contracts or approve expenditures related
to the program. The reprimand instructed the program manager to document that all
contracts and District policies and procedures are being followed, ensure program staff
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are fully trained, program participant applications are properly evaluated and
documented and good business practices are followed. The reprimand also included an
admonishment for testifying and lobbying in Olympia on behalf of the District on two
occasions without approval of the District’s Government Relations Department. Based
on the information provided by the District, the program manager frequently did not
comply with the directives outlined in the reprimand. He also retained the authority to
award consulting contracts and to approve expenditures for the program.

Despite the reprimand, the program manager contracted with consultants to meet with
state legislators and testify in favor of legislation even though he did not have the
authority to do so. The Executive Director stated in an interview that he was not aware
of these activities or that the program manager was not complying with the terms of the
reprimand further demonstrating he was not providing adequate oversight of the
program manager.

As a District manager, the Executive Director was responsible for establishing an
internal control system to help ensure resources are guarded against waste, loss and
misuse. This did not occur.

Program Manager: The District initially hired the program manager as a relocation
coordinator for capital improvement projects being constructed through the Building
Excellence Program, or BEX. In 2005 the Executive Director promoted the program
manager to manage the small works roster process despite his lack of experience in
awarding and managing construction contracts and managing personnel.

After discussing each vendor with District program staff, we learned the District received
minimal services in terms of the amounts paid to some of the vendors. We asked
District program staff why the program manager would award these contracts. District
program staff stated the District did not receive much benefit from work provided by
several vendors and stated the program manager wanted support from prominent
members of the community.

Environment: District program staff stated, although they had concerns about the
program, they did not bring them forward due to fears of reprisal. We found many
District employees were unaware of the District’s whistleblower and anti-retaliation
policies or did not trust the policies.


ABOUT THE INVESTIGATION

On June 28, 2010, the District’s Chief Financial and Operations Officer directed the
District’s Internal Auditor to report an instance of possible misappropriation to the State
Auditor’s Office. The Internal Auditor reported that on or about June 10, 2010, the
District received a $35,000 check from Tacoma Public Schools. It was deposited in the
private company’s account by an individual associated with the private company. The
District learned that the money had not been deposited in a District bank account and
District officials asked the former program manager to return the funds. The former
program manager gave the District a $35,000 cashier’s check after the District filed a
police report.

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On August 18, 2010, the District reported two instances of suspected losses and illegal
activity to the Auditor’s Office related to the small business program. First, the District
was invoiced $6,300 for architectural services performed at offices the private company
was leasing from the city of Bellevue. The District also reported it had been invoiced
$17,800 from a consultant who was doing business with the private company, not the
District.

On August 26, 2010, auditors met with District management to discuss the suspected
losses. At this meeting, District management notified us of concerns regarding its
Internal Auditor, which are discussed later in this report, and asked our Office to
investigate the suspected losses. Our investigation was to determine whether losses
occurred and to quantify any such losses. Our investigation does not include a
determination of whether the District’s program was effective or saved the District
money.

We asked the District for a list of all vendors under contract to the small business
program. We also asked the District to arrange interviews with current and former
District staff, the architectural firm and other personal service contractors. Of the 16
personal service contractors we selected to interview, two did not respond to our request
for an interview and one declined to meet with us. The former program manager also
did not respond to our request for an interview.


RESULTS

Losses to the District

We found the District paid for services it did not receive, for services that provided no
public benefit and for services and products for the private business.

Total known losses to the District are $280,005.25.

Services Not Received

The Executive Director of Facilities did not provide adequate oversight that would
prevent or detect the program manager from allowing vendors to charge the District for
services they did not provide.

For example the District paid:

A vendor was paid $163,175 for instructional services on dates when no classes
were taught. District materials do not identify the vendor as an instructor for the
program. Class sign-in sheets and class evaluations provided by the District
show this vendor attended classes as a student on dates the vendor billed for
teaching. The program manager approved the invoices, certifying that services
were rendered. We found no records to indicate this vendor provided services to
the District.

Another vendor was paid $20,210 for instructional services from November 2006
to April 2007. The vendor billed from 44 to 80 hours each month. District facility
records and class sign-in sheets for this time period show actual classroom hours
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ranged from 15 to 30 hours each month. The District also paid the vendor
$57,570 for “development”, lesson preparation, team meetings, communications
assistance and food between May 2007 and August 2007. However, District
records show the classroom reservations scheduled for that time period were
cancelled in January 2007. We also found no class sign-in sheets for May 2007
through August 2007.

Services For The Benefit Of The Private Company

The Executive Director of Facilities did not provide adequate oversight that would
prevent or detect the program manager from hiring vendors to provide services for the
benefit of the private company.

For example:

The program manager hired an architect to design tenant improvements to office
space in Bellevue for the private company. The vendor stated the manager
represented the work as a District project. The vendor also stated meetings on
the project were held in District administrative offices with the program manager
and other District personnel.

This vendor invoiced $6,300 to the District for these services, but the District did
not initially pay the invoice. The program manager then directed the vendor to
resubmit its invoice through a third party and describe the services as “Training
Development Design”. The vendor resubmitted the invoice as instructed, but the
District did not pay it. The vendor began demanding payment from the District.
The District advised the vendor to attempt collection from the program manager,
but the vendor’s efforts were not successful. The vendor was unaware that the
program manager hired it to provide services for the private company. In the
end, the District accepted a claim for damages from the vendor and paid the
$6,300 invoice.

The District paid another vendor $17,800 for meetings with state legislators,
community outreach and activities related to the private company. We reviewed
e-mails between this vendor and District personnel and governing members of
the private company. We also examined the original contract scope of work,
budget documents and business plan and conducted interviews with District staff
and the vendor. We determined all activities billed to the District by this vendor
were related to the private company.

The program manager approved a personal services contract with this vendor
that listed work that did not benefit the District. He forwarded the contract to the
Accounting Department. The District’s Accounting Manager did not approve the
contract because it included “preparatory work for transition of RSBDP to a new
501C3 Corporation.” The vendor resubmitted the contract to the program
manager with a modified scope of work. In an e-mail to the program manager,
the vendor stated the new contract scope of work does not include a

. . . significant amount of time to help with the RSBDP’s transition to a
501C3. Here are the additional areas that I can assist with that are
NOT included in my official SOW, for obvious reasons . . . .
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The vendor then lists activities in that e-mail for transitioning the District program
to the private company. These activities were not included in the official scope of
work. The program manager approved the invoices, totaling $17,800 even
though he was aware they benefitted the private company.

Based on District program staff interviews, we learned the program manager
hired a vendor to write grants and to research grant opportunities for the private
company. At the program manager’s direction, the vendor wrote grant
applications stating the School Board had authorized a request to help pay for
the first phase of a web-based training system. The School Board President and
District legal counsel stated no approval was given. The District Grants Manager
also stated he did not know about the letters. He stated the amount paid to this
vendor of $15,000, exceeded the District’s entire approved budget for hiring grant
writers. The vendor was unaware it was providing services for the private
company.
Losses to the City of Bellevue

Total known losses to the city of Bellevue are $39,873.40.

The city of Bellevue intended to become a sponsoring partner of the District’s small
business program in 2010. The city agreed to pay a membership fee in return for having
access to activities offered by the program. Separately, the city entered into a five-year
lease for the use of office space in a city-owned building. City staff stated they believed
the membership agreement and the lease were with the District. However, the lease
and the membership agreement were with the private company because, according to
city staff, the District program manager misrepresented these contracts as between the
city and the District.

The city paid the $25,000 membership fee in two installments. The program manager
and another governing member of the private company deposited these fees into the
private company’s account. As part of the lease, the city paid a real estate broker a
$14,873.40 commission based on a five-year lease. The program manager broke the
terms of the lease when he did not pay the second rent installment, even though the city
had already paid the commission. Also, the city did not receive the services called for in
the membership agreement.

Questionable Uses of Public Funds

Total questionable uses of public funds are $1,519,965.34.

The Executive Director of Facilities did not provide adequate oversight that would
prevent or detect the program manager from paying for services when invoices lacked
sufficient detail to determine the validity of the charges, were for services that did not
directly benefit the District or were for services District staff could have performed.

For example:

The District program manager circumvented District procurement requirements
on two occasions by instructing vendors to change billing descriptions on their
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invoices and submit the invoices through a third-party vendor. The program
manager also used the same third-party vendor to manage the program’s
instructor billings. Moreover, program staff stated the program manager hired
friends as instructors and had them bill the District through this third-party
vendor. The District has no policy or procedure addressing third-party billings of
this kind for personal service contracts.

Some vendors did not provide enough detail to demonstrate how the District
benefitted from its services. State law (RCW 43.09.200) states in part:

. . . the accounts shall show . . . all receipts, vouchers and other
documents kept, or required to be kept, necessary to isolate and
prove the validity of every transaction . . . .

Without further support, we are unable to determine the validity of the charges
billed by these vendors.

The District paid vendors for meetings with state legislators and testifying on
legislation. These vendors were unaware the program manager was not
authorized to contract for such services.

The District paid several vendors for assisting contractors that were not enrolled
in the District’s program and that were not competing for or performing District
construction projects. The District also paid these vendors for assisting
contractors on construction projects for other governments. Several vendors
stated they billed the District for these services because they did not have a
contract with the other governmental agencies.

The District paid consultants to attend weekly meetings at the District
administrative offices. These meetings lasted 1.5 hours; however, at least four
consultants billed the District two to three hours for these meetings.

Some vendors charged an hourly rate, yet billed the District for the same amount
each month. These vendors divided the total contract amount into equal
segments, regardless of whether services were provided on dates for which they
billed.

The District paid a vendor $74,780 to develop training materials. Based on our
review of the classroom training materials, it appears the materials were, for the
most part, copied from other sources.

The District paid a vendor $7,213 for providing food during classroom trainings to
class participants who were not District employees. These food charges ranged
from $737 to $1,652 per month. District records do not show the public purpose
of providing free meals to members of the public.

The District paid a vendor at least $6,000 to create and maintain a database for
the small business program’s Direct Hire and Apprenticeship program. The
vendor charged at least 120 hours to develop the database. District staff stated
the database was not functional when they received it. When we examined the
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database, we noted it contained only a list of student names and other identifying
information.

A vendor that billed on an hourly basis submitted one invoice covering 10 months
of fiscal year 2009, totaling $39,705, and one invoice covering a portion of fiscal
year 2010 totaling $19,950. This vendor billed 695 hours for outreach and
recruitment for the District’s Direct Hire and Apprenticeship program even though
District records indicate the program only recruited 150 people. In our judgment,
billing on an annual basis is unusual and the number of hours billed to recruit 150
people appears excessive.

The District paid a vendor for attending every apprenticeship support-service
meeting for the entire duration of the meetings. These meetings lasted three
hours. The District program employee who is responsible for running these
meetings indicated this vendor rarely attended the meetings, and if so, stayed for
just 30 minutes.

The District paid a vendor $25,000 for a software subscription fee for a database
designed to match small business owners with general contractors. The vendor
told us this database was not functional. District employees told us they never
used the database. Instead, they used different systems to monitor contractors.
Additionally, this vendor charged the District for indirect costs that in some cases
exceeded direct costs by three times as much.

The District paid a vendor at least $14,500 to train program employees as
business development counselors. We found the program manager hired
individuals with no prior experience for these positions and hired this vendor to
train and educate them on how to counsel small firms regarding construction
activities. If the program manager had hired experienced persons for these
positions, the District would not have had to hire and pay a consultant $100 per
hour to train District staff.

Actions of the Internal Auditor

Using a third party, and without the knowledge of the Chief Financial and Operations
Officer, the District’s Internal Auditor billed the District $1,070 for developing curriculum
and teaching classes. The District’s ethics policy states in part:

Employees may receive compensation for outside activities, provided the
outside activity is done on the employees’ non-work time, does not impair
the employee’s ability to carry out their District work assignments, and
otherwise does not conflict with this policy.

Since the Internal Auditor billed the District through a third-party, the Internal Auditor
could not be considered an objective reviewer of the third-party vendor’s invoices. The
Internal Auditor should have questioned the practice instead of participating in it.

On April 19, 2010, District program staff sent an e-mail to the Internal Auditor with
questions regarding an invoice they planned to send to the city of Bellevue. The Internal
Auditor responded to the e-mail stating,

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